Millions of pounds will be poured into flood defences as part of the Spending
Review to make sure householders in risky areas are able to get insurance
cover.

George Osborne said the Government will shortly "set out plans for a major commitment to new flood defences for the rest of this decade".

He pledged to maintain spending on flood defences despite a 10 per cent cut in the budget of the Department for Environment, Food and Rural Affairs.

Mary Creagh, the shadow Environment Secretary, said the Government's offer to maintain spending at current levels actually amounts to a "real terms cut".

However, his commitment suggests the Government is on the brink of a deal with the insurance industry, which has threatened to withdraw cover from households at risk of floods unless more defences are built.

Hundreds of thousands of homes could be left without insurance unless the Government and companies can conclude their deal, after years of negotiations.

Yesterday, Lord Greaves, a Liberal Democrat peer, suggested an agreement has at last been reached and would be announced "perhaps tomorrow".

"I heard this morning a rustling in the undergrowth and it wasn't oncoming water, it was a suggestion that an agreement had actually now been agreed between the Association of British Insurers and Government."

Lord De Mauley, an environment minister, said his colleague clearly had "both ears to the ground".

"We are at an advanced stage in discussions with the insurance industry about the future of flood insurance," he told the House of Lords.